Analyst Disclosure Rules to Be Unveiled
Lawmakers and regulators plan to unveil rules today that would increase disclosure requirements for Wall Street stock analysts.
The proposals are designed to prevent conflicts of interest, and include a measure that would bar tying analyst compensation to specific investment banking transactions.
They also would restrict an analyst’s personal trading of securities and bar securities firms from offering favorable research to attract business.
“Consider this Round 1 for comprehensive post-Enron reforms,” said Rep. Richard H. Baker (R-La.), chairman of the House Financial Services subcommittee on capital markets.
The rules were being drafted before the Enron collapse, but according to Baker, they are “highly pertinent and timely with regard to what went wrong in the Enron debacle and will go a long way toward making sure the hand analysts played in the Enron house of cards is never played again.”
The proposals will be detailed today at a Capitol Hill news conference with Securities and Exchange Commission Chairman Harvey L. Pitt and Robert R. Glauber, president and chief executive of the National Assn. of Securities Dealers.
A Thomson Financial survey of research recommendations covering Enron on Nov. 29, 2001, a day after the stock price fell from the 60-cent to the 40-cent range, found six “strong buy”s, two “buy”s, six “hold”s and only one “sell.”
Critics have long complained that analysts’ judgment is clouded by the large investment banking fees they collect from companies they rate.
Of the two brokers who changed their recommendations after Enron shares fell below a dollar, one went from “strong buy” to “hold,” and the other went from “buy” to “market underperform,” Baker said.
Baker said that congressional hearings held even before the Enron collapse “appeared to demonstrate the likelihood that the speculative bubble of the 1990s had been exacerbated by Wall Street analysts’ growing tendency to cheerlead and reluctance to downgrade companies whose stocks they themselves owned or whose investment banking business their own firms already handled or were actually aggressively seeking.”
Baker said the reforms will protect “unsuspecting minnows from irresponsible and self-serving sharks.”
Some remained skeptical that the procedures would help.
“It will be portrayed as a big deal and it will change absolutely nothing,” said Sean Ryan, head of equity research at Fulcrum Global Partners, an independent broker in New York that does not have an investment banking arm. Analyst conflicts are “a smelly, smelly situation and they’re just papering it over,” Ryan said.
Ryan, formerly an analyst with several major Wall Street firms, said the proposals were “a formal procedure to address a problem that doesn’t formally exist,” since investment banks rarely spell out what’s expected of analysts.
“Nobody’s compensation is tied to specific deals--not formally,” Ryan said. “It’s body language. Everybody knows the price of closing a deal is favorable coverage.”
Consumer advocates applauded some of the proposed rules but questioned how the NASD would enforce many of them.
Barbara Roper, head of investor protection for the Consumer Federation of America, praised rules that would require analysts to disclose conflicts in television and other public appearances, since that is how many investors get ideas to buy stocks.
But she said brokers who tout stocks to clients also should be forced to discuss their firms’ conflicts, and warnings about conflicts should be clearly labeled in analysts’ reports.
“You have to spell it out for people because they don’t get it otherwise,” Roper said.
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Simon reported from Washington and Pulliam Weston from Los Angeles. Times staff writer Thomas S. Mulligan, in New York, contributed to this report.
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